Foreign currency assets of the Reserve Bank of India (RBI) on 20th February 2004 stood at US $103.4 billion. That?s an accumulation of $6 bn in the first seven weeks of calendar 2004. March is the last month of the fiscal year, and there is bunching of inward payments. In 2003, reserves climbed by $4.5 bn in March and it is likely that this March too would see a big increase, say of up to $6 bn. That would take us to end-March 2004 foreign currency assets of $110 bn, an increase of $38 bn over the fiscal year and a rate of a billion dollars a week in the last quarter.

All this has come on the back of a spectacular rise in imports and a doubling of our merchandise trade deficit. In the first six months of the year, the balance of payments (BoP) merchandise trade deficit rose by 123 per cent. The magnitude of the BoP merchandise trade deficit in 2002-03 was $13 bn. In 2003-04, in the first half alone, it was $12 bn, and for the full year it is likely to be over $27 bn. Just for the record, the highest previous value for the BoP merchandise trade deficit was $18 bn in 1999-2000. In the good old days of the 1980s ? or the bad old days depending on one?s bias in the recollection ? this order of increase in the trade deficit would have set off a panic and sent the rupee spiralling downward.

Even in the post-reform period, sizeable expansion of the merchandise trade deficit in 1995-96, which swelled the current account deficit, saw depreciation by 9 per cent of the rupee against the dollar. Even in 1999-2000 when the merchandise trade deficit rose, despite no significant resultant pressure on the current account deficit, the rupee fell by little under 3 per cent against the dollar. In 2003-04 however, the rupee has till date risen by over 4 per cent. True it has fallen by 12 per cent against the euro, but that is of little import since the intervention by the RBI in the currency markets, the outcome of which is the big increase in its foreign currency assets, has been directed at managing the rupee-dollar parity.

So, what has been fuelling the upward pressure on the rupee, and are they transient in nature? The usual suspects when the question of transient flows come up, are foreign portfolio (FII) inflows and non-resident Indian (NRI) deposits. FII inflows have been very strong in calendar 2003, and so was NRI deposit inflows up to the summer of 2003. In 2004, FII inflows are unlikely to rise by as much as they did in the previous year, although together with overseas issuance of equity by Indian companies, the aggregate net inflow of portfolio capital is unlikely to be anything other than a large positive number. Mandated ceilings on the interest rate on NRI deposits have been progressively reduced to a fine rate of 25 basis points over LIBOR in October 2003. In consequence, at best the outstanding deposit size of NR(E) accounts might begin to resemble the stagnant level of FCNR deposits (priced at LIBOR for many years).

But the changes that have happened in the external accounts of the country are not transient. They are of a permanent nature, emanating from the growth in the service sector exports, including remittances of overseas Indian workers and tourism earnings.

Till the mid-1990s, we used to have a net positive balance on travel of between $1.5 and 2 bn. This declined after 1998, due to the combination of a worsening security climate leading to lower tourist arrivals and the increase in outbound tourist traffic from India. The balance turned negative in 2002-03 for the first time, would you believe it, since 1954-55. But with a mushroom cloud over the Indian sub-continent no longer prospective, tourists and business travellers have taken heart. In the first half of 2003-04 travel earnings turned positive again. We know that traffic has risen sharply over the past months, that hotel bookings have become tough to make at resort and business destinations alike. Travel earnings can only increase, and it would be a modest estimate that places net earnings on this account at $3 to $4 bn three years hence, with prospects of further increase thereafter.

Remittances by overseas Indians have been perhaps the most stable item in the external accounts. It has generally risen year-on-year and in recent times almost on a quarter-on-quarter basis. In the first half of 2003-04, the increase in remittances was of the order of 24 per cent. The average rate of annual increase over the past ten years is about 15 per cent. The rate may moderate somewhat over the next five years, but the increase would still mean an increment of $2 bn each year on top of the current year base of some $18 bn.

Then, the centrepiece of the show ? the export of IT/BPO services. The net balance on this count has been rising from a low base of less than $1.5 bn/quarter in 2000-01 to over $2 bn/quarter in 2002-03. In the first half of the current fiscal, this has further increased to nearly $3 bn/quarter, and we know that the trend continued in the second half. Outsourcing has caused a political storm in the US. It will be imprudent to expect that policy will not be crafted in response to this, and that these will not impose some constraints in the pace of expansion of this particular business. However, as long as capitalism remains the global economic arrangement, a fairly safe proposition, profits will drive corporate decision-making, and companies the world over will choose the cheapest vendor ? to save costs and increase profits. So maybe growth of the IT/BPO business will be at levels more realistic than some had predicted, but growth there will be, even if it is at more pedestrian levels.

Factor all this in, along with increasing investment income outflows, robust merchandise import growth and a feasible rate of merchandise export growth, what you get with tweaking the assumptions, is a current account balance that ranges from small deficits to embarrassingly large surpluses. That is also the reading of overseas investors and hence the shine on the rupee.

The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)